Building on cross-border expertise

The financial environment continues to change rapidly as asset managers and investment banks devise new products and techniques to meet the evolving market demand. In response to the higher returns achieved by many alternative investment funds over the past few years, mainstream fund managers have slowly but surely begun to offer similar management techniques, and Luxembourg service providers have been requested by their existing mainstream clients to support them in this development.

Luxembourg is Europe's leading domicile for traditional investment funds, the result of the country's promptness in implementing new European directives as well as the top-quality offerings of service providers operating in a stable political environment. As the second worldwide domicile for funds after the US, the Grand Duchy attracts some of the world's leading financial institutions in search of a topnotch domicile for cross-border distribution of their funds in Europe and beyond.

In response to the tremendous growth of alternative investment funds, service providers have increasingly developed an expertise in hedge fund administration. According to the Luxembourg Funds Industry Association (ALFI), almost 10 per cent of worldwide hedge funds' assets were administered in Luxembourg at the end of June 2005, with EUR87bn in assets under administration.

There are more hedge fund administrators in jurisdictions other than Luxembourg, due to the fact that centres such as Dublin started to serve hedge funds from the very beginning, mainly offshore structures. Nevertheless, Luxembourg never closed the doors to less regulated structures. Hedge funds, private equity funds and property funds have been administered for some time
under the dedicated legal framework constituted by Part II of the legislation governing investment funds.

However, recent years have seen new rules designed to fine-tune the regulatory structure for alternative investments, notably the 2002/80 circular from the Financial Sector Supervisory Commission (CSSF) for hedge funds, the legislation of March 22, 2004 on securitisation vehicles and the law of June 15, 2004 that created SICARs, the structure used for private equity funds.

By mid-2005, ALFI identified 43 Luxembourg service providers active in the alternative business, administering single-manager hedge funds with assets of EUR22bn and funds of hedge funds with EUR65bn in assets. In the year to June 2005, hedge funds assets administered in Luxembourg grew by no less than 120 per cent, while fund of hedge funds assets increased by 41 per cent.

Luxembourg offers real advantages compared with other domiciles, especially for regulated hedge fund and funds of hedge funds structures designed for cross-border distribution, for which demand is growing among European investors. Luxembourg's role is reflected in the fact that it services more funds of hedge funds than singlemanager hedge funds. Investors setting out to invest in alternative funds are slowly moving along the learning curve, beginning with funds of hedge funds before considering single-manager funds.

The regulated environment in which Luxembourg service providers have evolved over the past few decades is perceived as an asset by alternative fund managers, especially with the emergence of corporate governance, anti-money laundering and other compliance requirements as prime concerns. With the expertise of Luxembourg providers in managing due diligence processes and offering multi-jurisdictional regulatory reporting applicable to more complex funds, managers are left free to focus on generating alpha for their investors.

By Christophe Bodart - head of product management at RBC Dexia Investor Services